- 20 Marks
Question
wo accountancy students from a University have been asked to write a term paper on “the reasons why external auditors resort to sampling when conducting the audit of a large entity.” The students are of the opinion that they do not understand why this should be the case, if auditors focus on their work.
They believe statistical sampling is not always good for auditing, especially when a population consists of a small number of large items. It may be appropriate to apply audit tests to the entire population as all the items in the population may not share common characteristics. Added to this, they do not agree that samples could be representative of the population and also reflect the characteristics of the population. There is therefore the risk that the auditors may not reach a correct decision as against when the entire population is tested.
Furthermore, they said that they were confused on how the auditors will work on samples in such a way that all items in the population will be given equal chance of being selected and the key decisions that need to be made for effective sample design.
As an ICAN Professional examination candidate who has just finished reading Audit Sampling (ISA 530), you now saw it as an opportunity to recall and explain what you have read. You are excited to explain the above to the students.
Required:
a. Highlight key decisions to be made to influence the sample size. (4 Marks)
b. Outline the advantages and disadvantages of using statistical sampling. (8 Marks)
c. Explain the sample selection methods that will give equal chance to all the items in the population. (3 Marks)
d. Illustrate what the auditors should do when performing procedures on the samples. (5 Marks)
Answer
a. Key Decisions to Influence Sample Size:
- Risk Assessment: Higher risk levels may require a larger sample to ensure reliability.
- Materiality: Larger sample sizes are often necessary for items that could have a material impact on the financial statements.
- Audit Evidence Quality: Low-quality evidence may require additional sampling.
- Population Size and Characteristics: Larger and more diverse populations typically need a larger sample to provide confidence.
b. Advantages and Disadvantages of Statistical Sampling:
Advantages:
- Provides a basis for quantifying sampling risk.
- Enables objective and consistent selection criteria.
- Allows for generalization of results to the entire population.
- Supports efficient use of audit resources through targeted sampling.
Disadvantages:
- Can be time-consuming and costly.
- May be challenging to design for complex populations.
- Requires statistical knowledge and tools for effective implementation.
- Not all types of audit procedures are conducive to statistical sampling.
c. Sample Selection Methods for Equal Chance:
- Random Sampling: Each item in the population has an equal probability of selection.
- Systematic Sampling: Selecting items at regular intervals from a randomly ordered population.
- Stratified Sampling: Dividing the population into subgroups and randomly sampling from each to ensure representation.
d. Auditor Procedures on Samples:
- Perform Testing on Each Item Selected: Apply the audit procedures uniformly across all selected items.
- Replacement for Inapplicable Items: Substitute any item that cannot be tested with another item from the population.
- Document Deviations as Findings: Treat any untestable item as a deviation and record it accordingly.
- Investigate Deviations: Examine the cause of any misstatements or deviations to assess implications.
- Extend Procedures if Necessary: Conduct additional testing if deviations suggest broader issues within the population.
- Tags: Audit Sampling, ISA 530, Population Testing, Sample Size, Sampling Methods, Statistical Sampling
- Level: Level 3
- Topic: Audit Planning and Strategy
- Series: NOV 2022
- Uploader: Dotse